Highlights of the September EITF Meeting

Financial Reporting Presents: Highlights of the September EITF Meeting September 13, 2006

Agenda 1. Consensuses Reached: Consideration Given by Service Providers Purchases of Life Insurance Endorsement Split-Dollar Life Insurance 2. Modifications of Convertible Debt Instruments 3. Previously Bifurcated Conversion Options 4. Continuing Investment for Condominium Sales

Agenda 5. Eliminations (or Changes) in Fiscal Year End Differences 6. Administrative Matters

Learning Objective At the end of the webcast, participants should be able to identify and understand key accounting developments resulting from the September 2006 EITF meeting

EITF Operating Procedures Initial decisions = tentative conclusions FASB ratifies tentative conclusions (Sept. 20, 2006) Tentative conclusions exposed for 30-day comment period Comments discussed at first EITF meeting following comment period (Nov. 15-16, 2006) Consensuses must be ratified by FASB

Keep In Mind This webcast is based on the observations of Deloitte & Touche LLP representatives Official meeting minutes are prepared by the FASB staff and are available approximately two to three weeks after the meeting Tentative conclusions may be changed or modified at future meetings Consensuses reached are not final until ratified by the FASB This webcast does not provide official Deloitte & Touche interpretive accounting guidance

Consensuses Reached

Issue 06-1 Consideration Given by a Service Provider to Manufacturers or Resellers of Equipment Necessary For Service

Issue 06-1 Example: Company X provides satellite TV service Subscribers need a specific DVR box to receive signal X does not manufacture or sell the DVRs Reseller sells DVR for $200 Per contract X pays reseller $150 to reduce the DVR price to $50 if subscriber signs up for service 1.1

Issue 06-1 Third-Party Manufacturer Reduction of Service Revenue or is it an Expense? Reseller Consideration Service Provider (X) End-Customer Service Contract 1.2

Issue 06-1 Consensus reached If consideration contractually linked follow (modified) 01-9 Model Characterize (income statement) based on form directed by service provider to end-customer Directed as: Cash = cash consideration Rebates = cash Sales incentives cash Anything other than cash = other than cash Not directed = other than cash 1.3

Issue 06-1 Consensus Application Consideration Directed As Cash 01-9 model (06-1 model) Cash Income Statement Characterization Reduction of Revenue Other than cash Other Than Cash Expense Not directed Other Than Cash Expense 1.4

Issue 06-1 Back to Example Per contract X pays reseller $150 to reduce DVR price X directs benefit to end-customer: Product discount = Other than cash Characterize as expense 1.5

Issue 06-1 Transition Effective for the first annual reporting period beginning after June 15, 2007 Recognize as change in accounting principle retrospective application to all prior periods 1.6

Issue 06-5 Accounting for the Purchase of Life Insurance

Issue 06-5 Recap Questions in determining amount that could be realized FTB 85-4 Typical life insurance policy: Cash surrender value; plus Other contractual amounts Individual vs. group structure can impact amount 2.1

Issue 06-5 Example Group policy 10 executives (individual certificates): $1 million up-front premium At 12/31/06: $900,000 CSV (net of $100,000 surrender charges) Experience reserve $50,000 (final certificate surrender) DAC $25,000 (present value no restrictions) Amount that could be realized at 12/31/06? 2.2

Issue 06-5 Consensus Reached (Issue 1) Record contractual amounts in addition to CSV Must consider: Contractual restrictions deemed probable Other restrictions (e.g., amounts payable at insurance company s discretion) Fixed amounts recoverable beyond 1 year Record at present value Excludes CSV 2.3

Issue 06-5 Consensus Reached (Issue 2) Record at individual policy (certificate) level unless group surrender required Include amounts realizable upon surrender of final policy (certificate) Our example record $975,000 $900,000 CSV $50,000 Experience reserve $25,000 DAC 2.4

Issue 06-5 Effective date and transition Effective for fiscal years beginning after December 15, 2006 Apply as a change in accounting principle through cumulative effect adjustment Retrospective application allowed 2.5

Issue 06-4 Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements

Issue 06-4 Example Endorsement Split-Dollar Arrangement Employer purchases life insurance policy on key employee Employer owns policy Enters separate agreement: Endorse a portion of the death benefit to the employee Payable to employee s beneficiary Beneficiary receives portion of policy payout 3.1

Issue 06-4 Consensus reached Policy does not settle obligation Recognize liability: Based on substantive agreement with employee FAS 106 (if deemed part of a plan ) or APB 12 Often an agreement to keep policy in force Results in: Compensation cost over service period Potential gain on settlement 3.2

Issue 06-4 Considerations Significant comment letter feedback Settlement under FAS 106 Look to Basis for Conclusion 3.3

Issue 06-4 Effective date and transition Effective for fiscal years beginning after December 15, 2007 Apply as a change in accounting principle through cumulative-effect adjustment Retrospective application allowed (not required) 3.4

Polling Question # 1 Should the EITF include a Basis for Conclusion in the draft abstracts posted for the 30-day comment period? Yes, it would be helpful No, there is enough information in the Issue Summaries Not applicable / I have no opinion 3.5

Issue 06-6 Debtor s Accounting for a Modification (or Exchange) of Convertible Debt Instruments

Issue 06-6 Why the issue? Example- 05-7 Issue X issues $500M convertible notes At Issuance Conversion option $0 intrinsic value Option not accounted for separately under FAS 133 FV of the option- $100M Coupon rate 5% (Market rate w/o C.O. 10%) Day 2 Debt modified X pays note holders $100M / Conversion option removed 96-19 test Passed (Cash & Non-cash offset) 4.1

Issue 06-6 Why the Issue? Example-Continued X s interest expense Stated 5% rate to P&L $100M debt premium conversion option removal $100M debt discount- cash to note holders Premium / discount offset Market rate is still 10% 4.2

Issue 06-6 Tentative Conclusion Separate tests to determine extinguishment Cash flow test Conversion Option Test Add/Eliminate substantive conversion option If no extinguishment Consider conversion option FV Increase Increase Discount / Reduce Premium APIC FV Decrease DO NOTHING 4.3

Issue 06-6 Transition Consensus effective for future modifications or exchanges Beginning the first interim or annual reporting period beginning after Board ratification Retrospective application not permitted 4.4

Polling Question #2 What do you think about a threshold of 10 % change for determining whether a debt extinguishment has occurred? a threshold of 10% is appropriate a threshold should be lower than 10% a threshold should be higher than 10% any change is an extinguishment Not applicable / I have no opinion 4.5

Issue 06-7 Accounting for a Previously Bifurcated Conversion Option That No Longer Meets the Bifurcation Criteria in FASB Statement No. 133

Issue 06-7 Why the issue? Example- X issues $100M convertible notes At Issuance Convertible 1,000,000 Shares of X X s Authorized Shares- 50,000,000 Shares Issued & Outstanding 45,000,000 Vested Options Outstanding 4,500,000 No Other Share Equivalents FAILS 00-19 Test Para. 19 requires SUFFICIENT authorized shares Bifurcate & FV conversion option 5.1

Issue 06-7 Why the Issue? Example-Continued Six Months Later Shareholders approve increased authorized shares No change in common stock equivalents Sufficient authorized shares- Debt & Options Conversion option- Bifurcation no longer required Recombine conversion option & debt Issue is HOW to account for recombination 5.2

Issue 06-7 Tentative Conclusion Fair value of conversion option (the liability) reclassified to EQUITY Original debt discount- CONTINUE amortization 5.3

Issue 06-7 Transition Prospectively applies to all bifurcated conversion options that no longer require bifurcation Effective in interim or annual reporting period beginning after December 15, 2006 Early application permitted Retrospective application permitted 5.4

Issue 06-8 Applicability of the Assessment of a Buyer s Continuing Investment under Statement 66 for Sales of Condominiums

Issue 06-8 Why this issue? Profit recognition condominium sales Long-term nature 2 to 3 years Example: $1 million purchase price $100,000 down payment 9/1/2006 Construction completed / possession 9/1/2008 Percentage-of-completion or deposit method? 6.1

Issue 06-8 Statement 66 guidance Paragraph 37 five criteria for profit recognition At issue sales prices are collectible Collectibility (paragraph 4) Buyers initial and continuing investment Continuing investment (paragraph 12) Post-closing assessment? No debt 6.2

Issue 06-8 Tentative conclusion Buyer s continuing investment should be assessed Paragraph 12 assessment Amount equal to level annual principle and interest payments Hypothetical mortgage = selling price less down payment Our example $900,000 6.3

Issue 06-8 Considerations Continuing investment test 1) Additional payments during construction period 2) Larger initial down payment sufficient to cover test Test not met record as deposit 6.4

Issue 06-8 Effective date and transition Effective for annual reporting periods beginning after March 15, 2007 Apply as a change in accounting principle through cumulative-effect adjustment Sufficient time to apply? 6.5

Polling Question # 3 Do you think the tentative conclusion in Issue 06-8 (if consensus is reached) will impact how condominium developers do business? Yes, they will require increased down payments, additional payments, etc., to meet the continuing investment test No, if the test is not met, they will use the deposit method Not applicable / I have no opinion 6.6

Issue 06-9 Reporting a Change in (or the Elimination of) a Difference Between the Fiscal Year- End of a Parent and a Consolidated Subsidiary or Equity Method Investee

Issue 06-9 Why the issue? Example Parent Company X- December 31 year-end Subsidiary Y- Consolidated based on November 30 year-end In current period, Subsidiary Y conforms year-end to December 31 7.1

Issue 06-9 Tentative Conclusion Change in Subsidiary Y s year-end Change in Accounting Principle Apply Statement No. 154 Preferability required Retrospectively adjust prior years presented Record true-up to opening retained earnings earliest year presented 7.2

Issue 06-9 Transition Effective for future changes or eliminations Beginning first interim or annual period following Board Ratification 7.3

Polling Question # 4 Do you think retrospective application to all years presented for a change in a subsidiary s year-end is too onerous? Yes No Not applicable / I have no opinion 7.4

Administrative Matters

Administrative Matters Issues Added Application of AICPA Audit and Accounting Guide, Broker Dealers in Securities, to Entities that Engage in Commodity Trading Activities Accounting for Joint Development, Manufacturing, and Marketing Arrangements in the Biotechnology and Pharmaceutical Industries 8.1

Administrative Matters Other Matters Removed from agenda Subsequent Accounting for Executory Contracts Initially Recorded at Fair Value Under Issue No. 03-17 EITF D Topics SEC staff recommended: Nullifying D-63; D-73; and D-88 Amending D-53; D-86; and D-98 8.2

Other Resources

Other Resources Jim Kroeker Rich Starzecki Brian Maloney Contact Information jkroeker@deloitte.com rstarzecki@deloitte.com brmaloney@deloitte.com Other D&T Publications EITF Publications Webcast Playback accountingstandards@deloitte.com 90 days

Other Resources Description and Status of Current EITF Issues EITF Meeting Materials FASB Resources www.fasb.org/eitf/eitfissu.shtml www.fasb.org/eitf/eitf_meeting_ materials.shtml

Questions Copyright 2004 Deloitte Development LLC. All rights reserved.

Issues Discussed Issue 06-1, Accounting for Consideration Given by a Service Provider to Manufacturers or Resellers of Equipment Necessary for and End-Customer to Receive Service From the Service Provider Issue 06-4, Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements Issue 06-5, Accounting for the Purchase of Life Insurance Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4, Accounting for the Purchase of Life Insurance Issue 06-6, Debtor s Accounting for a Modification (or Exchange) of Convertible Debt Instruments Consensus Reached Consensus Reached Consensus Reached Tentative Conclusion Reached

Issues Discussed Issue 06-7, Issuer s Accounting for a Previously Bifurcated Conversion Option in a Convertible Debt Instrument When the Conversion Option No Longer Meets the Bifurcation Criteria in FASB Statement No. 133, Accounting for Derivative Instruments and Hedging Activities Issue 06-8, Application of the Assessment of a Buyer s Continuing Investment Under FASB Statement No. 66, Accounting for Sales of Real Estate, for Sales of Condominiums Issue 06-9, Reporting a Change in (or the Elimination of) a Previously Existing Difference Between the Fiscal Year-End of a Parent Company and That of a Consolidated Subsidiary or an Equity Method Investee Tentative Conclusion Reached Tentative Conclusion Reached Tentative Conclusion Reached